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tv   Book TV  CSPAN  November 13, 2011 6:00pm-7:15pm EST

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that no kind of cultural commerce was possible. plantation owners lived far apart, and olmsted noticed that they just didn't get together and share ideas and share information, and so the park system, what this was meant to do was to allow people to come together from all different backgrounds and all different neighborhoods within the city and mix in a democratic experiment, and so i wanted to close by saying it's wonderful to be here in washington where an example of olmsted's landscape is so very true to how he originally designed it, and the wonderful thing is here in 21st century, there's so many places where you can go in america, find olmsted's work in tact, and find his vivid democratic spirit so very alive. thank you very much. ..
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[applause] [inaudible conversations] >> peaceful abolition of slavery affecting frederick olmstead in his persuasion of england of joining the south in the civil war? >> let's see, the basis of abolitionism is greasing. he was a gradualist, another qualification of getting the times job. they wanted someone objective or sort of objective to go there, and gradualists believed slavery was wrong, but thought you couldn't impose -- one region o couldn't impose one and that also this was a complicated institution that needed time to be unwound. and so for that reason they thought because he wasn't a
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rabid abolition they thought a good person to go to the south and as you read his 48 dispatches, you see olmstead make an amazing transformation from being a gradualist to being someone who really becomes an abolitionist precisely because of what he witnessed and one of the most amazing thing he witnessed he saw a slave -- one thing when he was traveling one person jealously guarded with him was the actual punishment for the slaves. he travels around the south and no one punishes a slave and one man became comfortable around olmstead and he began to whipping a slave. he became complicit and he didn't stop the overseer and olmstead was on a gully and a horse flared his nostrils and
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olmstead took that as a very much a natural symbol, a horse's reaction that this was a deeply morally wrong thing to slavery. that was one of the real events that caused him to deepen his abolition sentiment. >> thank you so much. [applause] >> that event part of 2011 book festival group. for more information go to bookfest. >> coming up next on booktv,
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paul blue stein, a country that defaulted on a loan from the world bank, this is about an hour and 15 minutes. [applause] >> thank you very much. i'll just start by saying that i suspect there may be one or two people from the world bank here and i know people from the world bank are always concerned that perhaps they're the ones who are being picked out as the villains as a book like this. the world bank doesn't figure in this book much at all. it's barely mentioned so you might ask who are the bad guys? and i suppose i could tell you what the dedication says. i dedicated it to my children. i say in the first page of the book, you know, to my children. i list their names. and i say whom i will always love unconditionally even if they go to work on wall street. so that's the hint.
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[laughter] >> i'll just start off with a little bit of the ernest stuff. i have to give just a couple of thank yous and i promise not to go on like hillary clinton swank did at the oscars the other night. smith richardson foundation gave me a very generous grant to do this book. books like this, you know, don't normally sell in the hundreds of thousands and so you need to do that kind of thing to be able to do a book like this and i'm very grateful like that. the brookings institution was my home while i was book leave from the "washington post" and it was a great place to work and i'm very grateful to the "post" for giving me six months off from my job to do this. i'll try to speak tonight about sort of the process that led me to write this book. in particular, the process that led me to write it in the way i did. i draw some, i think, fairly sweeping conclusions in the book, namely, that the global economic system contains some serious flaws which produce some
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very perverse and even tragic results for countries that are aspiring to join the ranks of the industrialized world suddenly get the rug cut out from under them. it's fas there were this -- the metaphor i try to draw in this book there's this country club with the rich nations as the members. and the imf and the financial markets, the membership committee, and the applicants are given this tremendous requirement that they are meeting all the requirements for joining but just as they're, you know, their nearing the initial rite they have the club door slammed in their faces and they're thrown out of the street. argentina's rise and fall in the 90s which culminated in this crash in 2001/2002 i argue is really kind of the unsurpassed classic example of this genre. and the culpability of the international community in those events i argue is quite weighty. now, i hasten to add my argument is not intended to be what's
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called a global-phobe argument. some of you may be familiar with that term sort of either, you know, traditional far left or far right wing will globalization. for believers in raising the living standards in the developing world i include myself for those, this is a very dispiriting story. how did i come to write this? well, i was sitting home on a sunday in february of 2002 right after the crash -- or right in the middle of the crash in argentina and i got a call from a guy named david hoffman basically saying will you please go to argentina right away and this is because our correspondent was -- had to rush home for a family emergency. and argentina at that time had gone through this, you know, political social and economic trauma. there were these riots, you
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know, at the end of 2001 that led to the resignation of president ruin and they had five people who became president, some of them just for a matter of hours, but in any case, and they were defaulting on their debt and devaluing the peso which had been fixed at a dollar for one-to-one in the previous decade. and so i reminded david the foreign editor, that, you know, you don't think i speak spanish do you? he said well, but you speak economics or words to that effect and actually i have kind of become a specialist at the "post" and in journalism generally i guess, you know, a lot of newspapers have guys who -- you know, there's a big plane crash they have a bagged crash and cover the plane crash and they're guys and the civil war breaks out in some godforsaken spot and they have a backpack and they go cover it. and i'm the guy when the bond
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market in the country, you know, really reaches the, you know, god-awful stage i'm sort of the go-to guy for that. that's my little specialty. so anyway, so i -- i was, you know -- i was very sorry for the argentine people but i was quite pleased to have the assignment to go look at what was going on there close up. and you may imagine it was quite an emotional experience to be in argentina at that time. you know, these bloody riots had -- you know, the memories were quite fresh. these -- the banks were all boarded up. actually, they still are, many of them in argentina. and there were -- there were riots going on -- demonstrations going on everywhere, these pot banging things you probably remember hearing about. massive crowds gathering in the plaza de majio, the fabled
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square where juan peron and eva gave the rabble-rousing speeches. the looks on the people, the bitterness and the despair was really quite -- quite an impression. so, you know, also while i was there talked to some of the people who had been in the government when i had, you know, a few moments away from my daily reporting duties to talk to them about what had gone wrong. what was the key turning points and what was it like. their memories were fresh and i thought this is really dramatic. well, this is even more dramatic than the book -- some of the stories in the book i just wrote about the asian financial crisis and the book that was referred to. there was this also overarching theme of this country that had
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been such a success story in the 1990s, you know, it was the darling of the imf and, yes, the world bank and the markets and washington in general. and, you know, it had enjoyed this terrific growth. and finally seemed to be sort of putting its history of stagnation and hyper inflation behind it. it had a convertibility system, a 1 dollar per peso system that had finally brought stability to this country that had been unstable for the previous half century. and now it was such a mess so there was this great overarching theme. and it's easy to forget how argentina was lionized in the '90s because we tend to think of it as, you know, the typical basket case now. but, in fact, in the 1990s, argentina was ranked in the 1999 by something called the index of
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economic freedom that's put together by the "wall street journal" editorial page and the heritage foundation, argentina was equal with chile which is still a star performer in latin america and it was almost as good as australia and taiwan and these are not exactly terrible economies. and i want to give an illustration of how easy it is to forget how good argentina was. this is an illustration that's a bit personal for me because i got a review in the "wall street journal" of a couple of weeks ago by a woman on the editorial page, and she -- i mean, she said a couple of nice things about -- i'm happy to say -- i don't mean to say she was terribly unfair to me. she said that the book -- was written with panache and i really appreciate that but i can't resist pointing out that
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the following about her -- what she said which was that i should i shouldn't really blamed on argentina, quote, unrestrained government, it's prolive gait ways and, quote, taxes were stiflingly steep trade policy, too restrictive and the corruption of the government -- this was the government of president carlos men in who was president for most of the '90s. the corruption was legendary all meant a dynamic economy was, quote, impossible. well, i did a little research 'cause i couldn't help to think that perhaps the opinion of her opinion of '90s when they were booming and not entirely to my surprise i found out that was right. i found a column that she had written in enin a 99 in which she was rhapsodizing about the, quote, nearly miraculous presidency who, quote, managed the economic turn-around by ending hyper inflation, lowering import tariffs and dismantling
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much of the corporate tax privatizing even the state owned oil company and the result of this was 4.5% growth average from 1992 to 19998 -- 1998. she complained he was leading much economic restriction unfinished and a unsustainable budget but her story -- this column that she wrote was highly complementary on the whole of argentina's policies during the 1990s. and, you know, i say, i hope you can understand i sort of couldn't resist using this as my illustration for how easy it is to forget how this country really was regarded as a stellar performer. so anyway, i returned home from my troop to buenos ares thinking this would maybe be an additional chapter for my book or maybe part of another book. and in the spring and summer of 2002, economists were coming out with all these explanations, you
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know, just many of them wildly contradictory. i mean, not individual. i mean, one contradicting the other about, you know, what had happened to cause this terrible disaster in this country. some say it was a convertibility system, you know, that was doomed to fail. and other people said no-no, the problem is they didn't adhere to the convertibility system rigidly and some people said, well, it was the washington consensus, you know, this is sort of the free market orthodox macroeconomic policy sort of good -- the christmases of the imf and the world bank and other people said, no-no it was they didn't apply those principles with enough discipline. and there was some people who said well, it was tight budget policy and some say it was excessively loose budget policy. i tried to sift through a lot of these. i'm not a ph.d. economist but i'm allowed to kind of at least make up my mind about what makes the most sense and the argument that seemed the most cogent to me was that argentina was -- this was the term used by nancy
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birdsal the president of economic development. she said argentina was the spoiled child of the washington consensus. because it had been so admired for its reforms, it -- it had been indulged by the international powers that be, you know, the imf and the world bank and there were policies that were quite risky. and more specifically i was really impressed with the argument -- and this is advanced most prominently by michael muffa of the imf and he was very critical of his former employer. and he said the imf should have been much tougher. and in the 1990s they enjoyed a boom from 1996 to 1998. and it should have been -- you make hay while the sun shines, right? and storing up the grains for the hard winter ahead. i'm mixing my metaphors here. his point was, you know, specifically they should have had a much more disciplined
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budget policy. they even should have been running budget surpluses. was argentina so terribly prolivegate in the 1990s. i think that's an unfair term to use. the budget deficit during this period was less than 2% of gdp in a lot of years. and this is a figure that we in the united states can kind of envy these days, right? but because argentina had this convertibility system where the peso was pegged to the dollar so rigidly, it was a country kind of like someone with a bad heart, you know, they can't just eat, you know, a reasonably healthy diet. they have to have a real healthy diet and so argentina needed a really good fiscal policy because it had this very, very rigid monetary policy and currency policy, keeping the peso absolutely pegged one peso equals one dollar. no matter where you are. and that was their policy and the reason you need to have a
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really good disciplined budget policy when you have that kind of system is, you know -- sort of, what do you do if you fall in quicksand and what if you fall into a really bad recession? well, you have no way of getting out of it using your money supply, you know, the central bank of argentina, you know, the federal reserve bank -- the federal reserve is the equivalent isn't allowed to increase the money supply and that breaks the rules of the convertibility system and you're not allowed to, you know, deappreciate the currency so that you get your exports going because that's again against the rules so you have to use when you have a. you have to use fiscal policy and tax cuts, spending increases. so -- because that's your only lever. and so that means you have to -- you sort of have to store the grains for the bad times. you have to run budget surpluses and sorry about all these technical explanations, but when i read this argument about what had -- what had gone wrong, you know, it really made a tremendous amount of sense to me. and when you talk to people at the imf about it, they all said,
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well, yeah, you know, in fact that is what we should have done. so this whole argument made a lot of sense to me but it was -- that was sort of the technical stuff. that gave a good theoretical explanation. it really piqued my curiosity. why had people at the imf missed this? why hadn't they pushed the argentines harder and why they screwed up so badly? i asked people at the imf are willing to talk about these things fairly candidly at least as long as a recently decent interval had passed. they had two basic answers. the first one was we screwed up. i mean, they admitted. they should have -- they should have pushed a lot harder. but the second argument they made i thought was really interesting. they said that because the financial markets had been so ebullient about the argentina in the 1990s and they were pouring so much money into their country
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it made very difficult to convince the argentines anything was wrong. they would sometimes give the argentines warnings. they would implore them to impose greater discipline in their policies but argentines would say, well, this is the imf version and the argentines would say, well, the markets love you us. i asked some of the officials who were in power at the time and they said, yeah, that's what we said. so let me sort of interject one caveat here. i don't want to overstate the idea that argentina was some sort of completely innocent victim. on the contrary, i try to emphasize in this book that the primary blame for what went wrong has to be argentina's. the policymakers ultimately made the decisions that brought the country over the cliff. no one forced them -- no one held a gun to their head who said you have to borrow a lot of money. but the argument i make is that
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they got a lot of help for going over the cliff in the imf community. around this time, and this is sort of my intellectual journey of how i came to do this book. there were all these scandals erupting on the wall street after the bursting of the bubble and there were all these stories like analysts like jack grubbs and solomon brothers how they had touted the stocks of all these companies that their firms were doing business with. they were issuing, you know, the stock or the bonds of these companies and making a lot of money. and, you know -- i mean, no one really cared about this when the market was going up but when the marked crashed, suddenly they cared. and so, i started connecting dots, wait a minute, i wonder if something like this went on with argentina, too. and when i talked to people in the markets, some of them absolutely not -- nothing to do with argentina, but some people said, well, yeah, as a matter of fact, it did and here's some of
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the evidence. so i began investigating this issue. and i don't want to suggest that i found a smoking gun. if you remember with some of the scandals, with jack grubman, the telecom analyst with solomon brothers, the federal -- the federal investigators found an email in his computer where he called this company a pig, you know, this company that he was giving a high rating to for stock investors. i never found any email from any analyst who follows argentina saying, you know, this country is a big but let's pump it up. i came away convinced that if i had the subpoena power like a federal investigator instead of just being an journalist, that something like this out there exists but i have to admit, i have absolutely no proof. and i think the point here is not so much the people in the markets were committing fraud. that they were knowingly pumping
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up a country that was -- you know, that they knew was going to crash. it was more -- it was in their interest to do it. now, why was it in their interest to do it? argentina was issuing tremendous amounts of bonds. they were -- you know, when you bring a bond issue to market there's a lot of fees to be made. and as i did research i found that the big wall street investment banks earned about a billion dollars -- you're on tv. you're not supposed to do this. had a billion dollars in fees selling the bonds of argentina to investors in the u.s., europe, big pension funds, big mutual funds. and the analysts for these firms had -- i mean, it was -- again, i don't want to suggest that they -- you know, that they were knowingly lying about the country. i think that they honestly
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believed a lot of what they were saying. but i think they believed -- you know, and wall street like a lot of places people believe what's in their interest to believe and these people knew that the bonuses that they were going to get, you know, at christmastime were going to be a lot bigger if their colleagues in the investment banking department were raking in a lot of fees by selling the bonds of these countries. and one of them was argentina. well, anyway, the argument that there was -- you know, that there was -- i don't want to call it misbehavior but nonmarket behavior going on wall street is explained in a chapter of the book. and i won't go into all the details of it. anyway, you can see at this point, as i looked in this, i began to feel there was a lot more here than just a chapter for a book. that there was something much more important than just, you know, the tragic story of a country that's known more than
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its share of tragedy. you know, this was a story that really i felt exposed a serious problem with the global financial system. the problem, i think, is this propensity to pump up the economies of the countries that we call emerging markets. the countries of latin america, asia, eastern europe and so forth. and pumping them up to the point where they become seriously vulnerable. i liken this in the book to sort of like, you know, athletes taking steroids. you know, it pumps you up for a while but it undercuts your health in the long run. it's a term i have to say i'm very indebted to ken rogof who succeeded michael mussa. steroids is what inflows of foreign capital i think can often have -- the effect is -- can be quite similar to
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steroids. it's, obviously, not, you know, intended as a literally analogy but i think it's an illuminating one. so what really struck me again in terms of the importance of all this was this kind of contrast between the theory of how globalization is supposed to work and how it works in practice. i'm sure lots of people in this room are familiar with tom friedman's book "the lexus and the olive tree." in that book he makes the argument that -- and i think by the way there's a heck of a lot that's commendable in that book but one of the arguments that he makes that i do disagree with is that financial markets will push our country -- force a country to discipline itself to embrace good policies because once the money is, you know, in the country, the policymakers will be so terrified that it's all going to rush out that
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they'll -- that they'll be -- you know, they'll really pull up their socks, mind their p's and q's and all the other cliches apply. and what i found and this is not a particularly original insight with me. there was quite the opposite problem that occurred in argentina. there was a complacency that the policymakers -- because the markets were so enthusiastic about and they were saying well, the markets love us. what's to worry about. i mean, we're borrowing money but when it comes time to pay off these bonds, there will be more people can go give us the money so that we can pay them off and, you know -- i mean, this is what the u.s. government does after all. there's nothing all that simple about it and if your creditors are willing to constantly finance you, you know, you can get away with that kind of thing for quite a long time. and what i think this book adds to this whole debate is this numbing effect and this complacency effect is
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exacerbated by the problems of the conflicts of interest that exist on wall street and there are a couple of other technical problems that i explain in the book the way big money managers' performances are rated which has also impelled them to invest in the country very heavily. so the result of this is a kind of a classic case of a syndrome that's become very common in several years, from thailand to indonesia to korea, russia, brazil and so forth where developing countries undertake reforms and they -- this draws a large amount of capital from abroad and the capital comes in and fuels a boom and that draws even more capital and then excessive amounts of capital and eventually the country becomes vulnerable to a sort of crisis that argentina fell into in 2000 and 2001. now at the same time as i was gathering all this evidence
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about what had sort of led up to the crisis, i was also talking to people at the imf what had happened to the -- during the period after the country got into hot water which was 2000/2001 what they had done. what had gone on behind the scenes and also talking, of course, to the argentine officials who were negotiating with them. i found a clear connection between these two phases. the good period when the country was booming and they were getting pumped up full of steroids and the latter period where they sort of fell into recession and, you know, they needed emergency help. and i knew i had a great way to illustrate this point when i came across -- when i found out about this really fascinating meeting that took place in october of 2000 at the argentine embassy which is, you know -- i don't know a couple miles from
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here. out on dupont circle. a guy came to visit the argentine ambassador. his name is charles, a professor at columbia university. and the ambassador told me later how this meeting had really made an impression on him. he said to me, you know -- he spoke perfect -- really great english but i couldn't help but burst out laughing when he said to me, i had never heard the word haircut used before in an economic context. now, what was he talking about? well, by that time, argentina was in quite serious trouble. its growth period had come to a rather abrupt end in 1999. there's crisis in brazil. and that had led to a devaluation of the brazilian currency and this is spreading to argentina and causing a lot of problems with their exports and brazil is a big market for argentina. so there's a lot of factors that were -- that had sort of caused argentina to fall into recession. and what the professor came in
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to the embassy to argue. you got to default on your debt and the sooner you do it the better. because you got an -- you built up an unsustainable amount of debt during this book period in the 1990s and the sooner you deal with that problem the better you'll be. the longer you wait, the bigger the crash, you'll default anyways so you may as well do it earlier when the effects will be at least somewhat minimized. well, in looking back at this episode i think he was being quite cavalier because when a country defaults on its debt it's an extreme consequential thing but the argument he made played out. i mean, really almost exactly as he predicted over the following 12 months. 14 months. and instead of following his
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advice, the argentines tried to hold on as long as they could to the convertibility system and -- and paying every penny that was owed on their debt and remain ago debtor, a borrower in good standing in the international financial committee and it did end up making things worse. the country's agony was worse later on. the reserves of foreign currency, you know, drained out of the country. the banking system was terribly weakened and what happened was the imf gave two big rescue loan packages. one in december of 2000 and another in august of 2001. and, you know, it's one thing to default on loans to bond holders but it's quite another thing to default on loans to the imf. you really do become -- countries who default on loans to the imf is sudan, liberia. you get the idea. you really do become an international pride. so the loans the imf made to try
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to bail the country out to keep it afloat so that it could somehow keep the balls in there, keep the system going ended up, you know, piling debt on top of debt. and now, this whole story would be a lot less worrisome, you know, why should we care about what happened to this particular country if argentina were unique. i mean, if there were like a perfect storm and you could say, well, it's, you know, this really wouldn't happen any place else. and i just want to read one -- i'll confess this book isn't shakespeare but there's one little passage that i'm especially whetted to, i'm in love with my own words. this is my favorite little bit. this is the beginning of chapter 10, my final chapter, rest easy. argentine bubbles --
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argentine-type bubbles are not about to materialize elsewhere. markets have a marvelous capacity to self-correct. and argentina's default chastened international investors and lenderds so severely that they have demonstrated a new level of sobriety in their approach to merging market countries. this caution on the part of the global market players should reassure the world that there is no longer much reason to worry about global markets pumping up the economies of developing nations to the point of intemperance. my next line is, unfortunately, the preceding paragraph is a laughable fantasy. i'm sure there must be some people here in the audience who are familiar with current conditions in financial markets and perhaps specifically with emerging markets. as you know, i mean, the technical terms are spreads are very low. the interest rates that the markets are demanding on the bonds of emerging market countries are, you know, only about 3 to 3.5% above u.s.
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treasuries because their people in the marx are throwing so much money at these countries because the interest rates in the united states and europe and japan is are so low that big investors want to get extra yield and they are even so happy to get 2 or 3 extra percentage points that they are throwing money at these countries right and left. what that means to me is that it's more urgent than ever that steps be taken to prevent other countries from falling into this type of mess. and i propose a list of things -- none of them will be at all popular with the -- with wall street. i was joking the other day -- if all of the things that i proposed at the end of my book were adopted the financial markets would feel like ras butein, shots, drowned. i really don't mean any of this personally against people on wall street. i talk to people on wall street.
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some of my best friends are from wall street. but i do feel that the way the system works that, you know, that this -- this -- the incentives are such that they end up doing things that are not good for global stability and -- for the good of mankind in general at least in certain cases. so anyway, i'm certainly not going to tell you the laundry list of the poisonings and the stonings and exactly how i propose to stick the knife in and how many people should be in the firing squad. i'll be happy to talk about it if you're really interested. the important point is not the details. the point is, you know, you really need to do something about this, i think, 'cause if we just stand by and leave the system as it is, we'll have no one to blame but ourselves if this bubble bursts and i really do think we have a bubble in
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emerging markets now and it surely will burst. global capitalism will not spread and thrive if -- outside of the borders of rich countries if something isn't done. so it's very much in the interest of those of us in the rich countries to do something about this. it's for us to act and act boldly and with that i'll be happy to answer questions. mra[applause] >> yeah, right. you alluded to the fact that argentina's gross product was considerably less than our gdp. how much of what you said
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argentina might apply to us, to the u.s.? and what would be the remedies, proposing similar remedies. >> i love that question. [laughter] >> i do actually have a section in the book at the end where i say -- there's one more thing we have to talk about here folks, because the book really is mostly about what happens with emerging markets. but i do think that there are some very frightening analogies between what happened in argentina and what could happen to the united states. what is happening in the united states. the reason it's important to talk about emerging markets and these countries that are sort of -- tried to climb the ladder of industrialization and they're almost there. they're really trying to get into the top rung is that the system is really stacked against them in a lot of ways. i mean, you know, one clear example is they can't borrow in their own currency very easily, or at least not very cheaply.
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we can. i mean, this is a huge advantage for the united states, huge advantage for europe. huge advantage for japan and another rich countries, switzerland. we can borrow in our own currencies and that means that the markets don't have to really worry about default, right, because our central banks have the power to print as many dollars as we need if we get into trouble, if we get in over our head in debt well, you don't to have worry about default. you have to worry about inflation because, of course, if you print a lot of dollars, the value of your bond may be reduced in some real sense but you don't have to worry about default and that's a huge advantage that the united states has that countries like argentina don't. and the on her thing is it's more -- it's almost kind of a psychological factor is the markets assume that countries like this one, like ours, will -- you know, will be able to work through their problems.
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that the system is more mature. the institutions work better. and ultimately, you know, we'll come to our senses and if we really need to knuckle down and do something about our budget problem, we will. and, you know, they don't give the benefit of the doubt to countries in some of the less advanced parts of the world. so the final point is that there's this huge -- that rich countries have this huge amount of money sloshing around. the insurance companies, the pension funds, the mutual funds -- you know, it's in the tens of trillions of dollars. and not -- and it slobs around the world. and, of course, most of it is invested in the rich countries. it's invested in the united states and europe and japan but some of it is invested outside. and these countries are much smaller as you rightly point out. argentina's gdp at the peak was
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$300 billion. the united states gdp today is an $11 trillion range. so even just small, you know, groups of money that the rich countries are investing can cause -- you know, it's kind of -- this is no -- not an original metaphor for me but it's like a boat on a big choppy sea and a big wave comes in and swamps the boat. so the point is, you know, first of all, the answer to your question is whether we have a lot of advantages that they don't and they have a lot of disadvantages that we don't. having said that, i am absolutely struck as i listen to the debate in the united states today about our trade deficit and our budget deficit because the -- i mean, i cover the u.s. treasury at least the international side of it. and secretary snow is quite fond
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of saying that trade deficit is a sign of our strength. [laughter] >> and, you know, look, in a way he's right because in order to run a trade deficit, you have to have money coming in from abroad. i mean -- and the argentines made exactly the same argument in 1998. that's what i found so eery about this parallel. they made the argument well, our trade deficit is a sign our trade deficients because countries are pouring money in here and, of course, it's a sign of strength until they stop pouring money. so i think -- yes, i mean, i think the reason i love your question is that i find the parallels quite disturbing. i think that it's all too easy -- it's much too easy for emerging market countries to be
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lulled into complacency by the fact that the markets love them. and i really think there's reason to worry that our country is being lulled in complacency by the fact that this money is pouring in. all of a sudden, something can happen and then the money all goes out. >> that was an excellent question and a very good reply and an area of question. next door to argentina's chile which has been benefiting -- i'm not an economist but a tremendous growth in the last several years and so i'm wondering if that's a very different situation or if they are potentially in a bubble. that's one question. and the other is a request that may or may not be relevant. i've been working in development f for most of my career and and i spent time in latin america but one of the things that
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disturbing me the united states, the multilaterals, world bank, and others have been for years pumping a tremendous amount of money in to support development to social sectors, health, education, et cetera to the extent that they are supporting anywhere between 40 and 80% of the recurrent costs in those sectors. so it's a different case but when and if those money goes, those countries fall on their noses. so i'm wondering if you folks -- any of your folks have taken an interest in writing a similar book on that and then the other was the chile question? >> i'll have to kind of plead ignorance on chile because -- i mean, i feel that there's an -- there's a probably in emerging markets generally. i haven't looked that closely at chile lately. i remember when i first started looking into this whole issue of the behavior on wall street and argentina, one of the people i was talking to who was -- who was especially candid about all
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the problems the conflicts of interest that existed, the same thing are happening and the firms are making jillions of dollars from selling the bonds. >> i think it would be irresponsible to me to suggest chile, you know -- i've met a lot of policymakers from chile who i think are extremely impressive people. the policymakers in chile have always been extremely impressive. so, anyway, you see my point. you know, who -- you know, where it will hit, where the fickle finger of fate will strike, i don't pretend to know. i've talked to people who have had various theories but, you know, i don't feel competent enough to say, i mean -- well, you certainly have to think i mean, i will mention one country
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that is in deep do-do right now is the philippines. and trees a lot of reasons to worry what happened in argentina will happen there. i don't know if that's any inside information that someone is going to rush out and call their broker to use, though. the second question -- i'm not sure i understand. you're talking about official -- >> yes, official development support. >> yes, yes. >> not for shoring up the economy but for recurrent budget expenditures in countries that are desperately poor. >> uh-huh. >> malawi, ethiopia, madagascar have assumed such incredibly high levels that they're keeping health and education systems afloat. but you got the same kind of parallel analogy at the moment which -- you lose interest. these education health and other
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systems can crash. >> it's a different case. it's a different concern because here you're talking about decisions that are made by officials, by the g7, by -- you know, by people in washington and london and brussels and tokyo rather than by the huge massive financial markets that can be kind of panicked into pulling money out. but you're quite right. and, you know, we do lose interest in these countries, don't we? we suddenly get all excited about, you know, the victims of tsunamis as well we should. but often what happens is that -- is that money that's desperately needed in these countries -- and i can't remember the figures. some of them are -- the effect of a tsunami in africa every five days in terms of the number of children who die in terms of preventible diseases. yes, i take your point.
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but it is an entirely different -- >> no, i'm just encouraging you to do a similar book. >> okay. >> i didn't do my homework but i assume you had a lot to do with that article in the "washington post" today on argentina. >> yes. >> okay. the two things i wanted to ask, i've always been told or heard that countries don't go bankrupt. i don't know how much truth that is today. but still it seems from what the article said that most of the bond holders have accepting the 32% and others are supposedly in the cold and argentina keeps going on and going on. and unemployment and that seems to be the downside and that hurts considerable people but country is still functioning. >> this is a very important question because a lot of people are -- especially on wall street are looking at what's happening in argentina right now.
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and in saying, well, what's the downside of just renegativing -- renegativi renegativing -- renegative -- but i tried to answer that question. about why i don't think argentina provides a model at all for other countries to follow. this country has been through hell. and you can see that just by talking to people in the middle classes and every night there are still thousands of unemployed argentines in this one very prosperous country who go out and who sift through garbage who can find for anything they can sell, anything
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recyclable, anything -- castoff plenty of sunshines anything they can get a f-- castoffs and plenty of pesos to sell. i went out and talked to people who were doing it because we journalists like to find the dramatic stories. and my story was careful to say, look, this isn't a country where the majority of people have to resort to this. it's still -- it's still, you know, a middle incomed country. but when you talk to people, the average argentine -- statistics, you know, really indisputable about this. the average argentine are much substantially worse off today than in 1998 in terms of real -- the real purchasing power of their income. and i talked with people who said, well, yeah, in the '90s, you know -- i quoted one of the people in the article this
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morning. i had -- my family could have any kind of meat, any kind of delicious kind of steak, it's a country that's famous for its beef. one guy i talked to bought a peugeot and fiat, very modest car in the '90s. he had gone on vacation and he was a nurse at a public hospital and he had five kids. and, you know, that gives you an idea how prosperous this country was in the 1990s. they nearly as rich as we were but they were coming pretty close to our league. now, you know, this family -- they can still have meat, but it's stew meat. and one of the cars that they bought has to rent out as a taxi. and the other car -- well, that's this little two-door fiat, 1995 fiat, is what they
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use for family vacations. him and the five kids and the dog. and they go on vacation in argentina. listen, this isn't as desperate as the countries this lady was asking about. this isn't malawi. this isn't the most tragic sob story you ever heard but it's one heck of a lot worse off. it's a typical example of what's happened to the middle class in that country. and no principled government wants to put its people through that. if they put their people through that, they're going to be thrown out on they're. in fact, the evidence overwhelming suggests that almost as soon as a government defaults, that, you know, that the government -- that they fall. they are all forced to resign. this happens in case after case. so i simply don't buy the argument that -- that there's a terrible moral hazard set up here to use an economist term.
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that argentina will provide a beacon for the rest of the world to follow because if they really look closely at what has happened there, and if the -- even just -- forget what happened to the people. if the politicians just look at what's happened to the politicians who were in power at the time of the default, they will not want to follow that example. but i think it's a very important question. and people are making the argument that a very bad precedent is being set. i really have my doubts. i just got back from argentina myself. and it is a sight to see middle class families, the whole families, parents, kids, that are ought out late at night going for car board basically sorting the garage from the car board. you didn't mention the ratio -- the average ratio is 3 to 1. the peso is pegged to the dollar.
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it fell 66%. and the prices stayed the same. the prices didn't change. you pay a dollar for what was labeled -- what was -- you pay -- well, you pay a peso for what was labeled a dollar. and the interesting thing where you really see it is in the automobiles. the automobiles are the same price 'cause it's the world price on automobiles. world price on gasoline. you translate that to dollars. it's still $4 a gallon for gasoline approximately. it's always been that. anyway, i'm just corroborating what i think your analysis has been wonderful. there was one very disturbing thing that occurred while i was down there. mennan got elected as senator. all right? and why did he get elected as senator? the wealthy people love him. he kept the peso to the dollar so they love him.
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they want him back in there so he can put it right back up. the middle class are kind of desperate and they would like to be better so they're also for them but you talk to the intelligencia on the street and they know that's the worse thing for mennan to come back in. i wanted to ask you, since you have a much better view than i do, what is the prognosis? what would you guess for coming near future in the next three, four years? >> well, i think for the next three, four years things are not too terrible. i mean, one of the points i tried to make in this story this morning is that to everyone's sort of surprise the economy is recovering. i mean, people are still feeling the shock of -- the after-effects of what happened in 2001/2002. as you quite rightly pointed out. but despite the fact that this country has defaulted on its
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debt and it's forcing its bond holders to take 32 cents on the dollar and they're outraged by this, how dare you treat us so shabbily, that when a country does this no one will invest there. this is what the sort of high priest of the system will tell you. well, this country -- no one will -- no one will ever take than country to lunch again. they won't invest there. they won't -- because of the disrespect for the property rights and so forth. well, there's a heck of a lot of investment going on because as you pointed out the paso is 3 to 1 where it used to be 1 to 1. i interviewed the head of volkswagen argentina, a man named victor klima who said, you know, we are -- he made this claim. i'm still having trouble believing it. auto workers in his factory are cheaper than volkswagen workers
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in china. i mean, it's a stunning thing. now, with that -- and very good quality, very good -- you know, he said they're 42% of the workers at this plant where they make transmissions for one-fifth of all volkswagen in the world. 42% of them are college educated. so it's great quality at a low price. this is not something that companies can very easily resist. now, of course, if every investor that comes there is, you know, treated taxpayer apply and they're worried about having their property expropriatiated then, of course, money will not go in. but i'm sure that argentina would get a lot more investment if it were doing a lot more to show companies like volkswagen that they would get a fair shake. they will be treated according to the rule of law. but i have to say the prognosis for the next three, four years i
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think is pretty good. having said that, argentina -- even after they give the bond holders this haircut to come back to the term that was used at the beginning of the argentina embassy, the haircut of almost 70% on their bonds, they're taking that big of a writedown. even after that, argentina is coming come out of this with a debt to gdp ratio of their debt to their total economy of about 85%. that's very high. and a lot of people worry that you could see another default in six to eight years if they don't really buckle down and take a lot of steps to ensure that they generate the kind of growth and investment that they need to be able to pay off that debt, service that debt. and to generate a really sustainable expansion. >> i'm working on a deal to bring carlos mennan to washington in exchange for marion barry and a dictator to
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be named later. [laughter] >> a nondisclosed amount of cash clearly has to be part of that deal. >> well, the cash is under the table. [laughter] >> my question concerns the argentine economy. ever since i've been a toddler, argentine has suffered all kinds of hyper inflation, financial crises, et cetera. you've got a country rich in natural resources, agriculturally self-sufficient, an exporter i think ypf produces enough oil for the country. you have a very europeanized population, the most in latin america, why isn't argentina like australia? >> well, the really tragic thing about the story is in the '90s they thought they were getting there. and to all outward appearances
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they were getting there. from all resources, natural and human, and early in the century as -- i'm sure i don't have to tell the audience this well read, argentina was one of the ten richest countries in the world. they had a very, very high standard of living, you know, at least relative to most other countries. and, you know, i mean, they're famous for their arrogance, for looking down their noses at the rest of latin america. we're not really latin americans, we're europeans. and, of course, it's been a terrible traumatic experience for the country to have gone through the past century and, you know, all that slipped away. .. and in the '90's, they felt --, of course there were doubters and in a country that has been through that is never truly self-confident. but they had the sense that finally they were getting it together.
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and that they were going to overcome its history that they have. that's really i think the most tragic part of this story. you know, i don't pretend to be an expert in the -- in the argentine their social psyche. i felt as if i was writing the book that if i tried to explain it, that i would -- you know, the people who really know would just make fun of me and i -- you know, i'm not just expert enough to do it. i felt i had a story to tell about was how the international economic forces had really helped push the country in this tragic direction that it took. and that it's important for the argentines to come to grips with exactly the things you're talking about. what is it about them that decade after decade causes them to fall into this pit of despair?
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well, i mean, i had some vague ideas, but i think what i think is important for us in the united states and other rich countries to do is to come face to face with the fact that international institutions and forces and -- and officials helped, you know, really fuel this most recent crisis, this tragedy that the country has been through. >> i'm not an anti-globalist, i swear. i'm not anticapitalist, as far as going where this -- i'm going where this statement. if you have one of the few positive examples of going to the rich countries they relied on trade and with the outside world. i guess the east asian rim comes around.
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it's still depressing because you look at the -- as you said, the vast majority of stories have involved booms and busts and busts that left you not really wondering if you ever got any further ahead than where you started. and, you know, you have to start wondering, i mean, it's a principle of economics that debt can be a good thing. i mean, a lot of is in their interest to do say it at given times. john maynard scott said use the capital infusion to grow, but it leads me to believe there's a certain degree of skepticism that debt can ever really help an emerging country. taking enormous amounts of people and having to pay back three times the amount of money you started with is that really something that helps? i start to think about the contrasting it to the domestic economy where everything is stable. i'm going to take on a little bit of money and i have to it pay it back but i have specific conditions for the growth and the people know what i'm doing,
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compared to capitalist flows where i want my 2% and i can leave it any time. i guess the question i'm leading up to, i'm kind of tempted to say that speci speculative capi a fatally flawed view for helping the countries who have long-term growth plans. the other thing i had to say was a brief one to the last question. the incoming inequality, i wonder what you think of the -- >> sorry? >> the previous question, why they have had such growth, macroeconomicly? >> well, just -- i think there ask -- there's a lot to what you say, but just to quickly address that. there is the fact that -- at least in latin america, argentine has been one of the least unequal. now, that's all compared to
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what? comparisons are pretty awful. but it's not -- i don't think that you can use that -- it's certainly not, you know a major explanation i think for what's gone wrong there. i mean, there has to be something else because as this gentleman pointed out, they keep, falling into these crises. but i don't doubt that it's related to a lot of the forces that lead to those -- to these crises. i think the point you made about debt and speculative capital, i mean, you phrased it a good bit more shall we say fervently than i do in the book. but, i mean, i don't think that that -- i don't think that capital flows have absolutely no benefits. i think, you know, kind of like anything. you know, used in moderation, it can be a very good thing for a
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country to be able to borrow in international markets when there's not adequate saving in the domestic economy to finance growth. the problem is as you say, and i try to argue in the book, that there are forces that cause these things to go too far. i'm not like -- i don't want to suggest that i completely disagree with you either. >> is there a magic numb borer a formula or -- magic number or a formula that says when debt is good or bad? >> there's a paper that has a lot of influence by ken row goff who became the chief economist to the i.m.f. and others and they that are -- they argue for emerging markets really 25% of g.d.p. is about as high as you
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ever want to go. i mean, they base this on all kinds of aggressions and equations that my 16-year-old son understands and i don't. i used to be able to do this, but i can't anymore. and -- but, you know t scary thing is that the average ratio of debt to g.d.p. for emerging markets is now -- i mean, i don't know if it's the latest numbers, but i think it's the high 60's, low 70's. i mean, it's higher than for the industrialized countries, for the rich countries. so what this tell you is, i mean, well, if you marry that fact with the fact that there's all this money that, you know, this boom, that is being -- all this money is being thrown at these countries, well, you know, one might hypothesize well, perhaps, that's not a bad thing that all the money is going to the countries because there's -- they're so much fundamentally
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better than they used to be. that's why the money is going. but if you look at the debt to g.d.p. number you have to say, wait a minute, things aren't that better. you can look at individual cases and say it's better here for this reason or better there for that reason. to me this is being driven not nearly much by fundamentals, but by the fact that there's a heck of a lot of money being pumped into the system and the big investors are -- you know, every quarter or every month or sometimes every week, they get rated by how much extra interest they're earning on their money. so of course if they can make a couple of extra, 25 basis point, quarter of a percentage point more than the guy down the street, and they come out ahead of the index by which they get measured, it's very tempting to do that because your bonus will depend on how successful you are on that type of thing.
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so i worry about it. yes? >> here's a question that you can make a parallel, if you'd like, like the first question to the united states. given its heyday and since you accentuate fiscal policy, were the upper and maybe upper middle classes in argentina undertaxed? >> yeah. i mean, undertaxed is, you know, is a term with many meanings. but tremendous tax evasion in that country. i think they should have done a heck of a lot more to do something about that. it was a major contributor to their fiscal problem. and it was a systemic thing and part of the problem was they kept offering amnesties every couple of years so you can bring in money, we give you this one-shot load of tax revenue.
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but of course once you start doing that, then people think, well, i can cheat because in a couple of more years there will be another amnesty. eventually, the kind of thing where it creates a different kind of moral hazard. but, yes, in that sense, yes, definitely undertaxed. >> just a question. you mentioned when you spoke to the people at the i.m.f. their first explanation was that they blew it. what does that mean? does that mean that the technical people at the operational level were not sufficiently competent to understand it? or does it mean that they had incentives of the operational level not to pursue certain lines of argument or it means that the organization as a whole couldn't accept the technical conclusions or perhaps worst of all, that these systems are now becoming so complex that in fact
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none of us can understand them anymore. that these big systems are frankly beyond us to predict an advance to what's going to happen. >> a lot of the things that you mentioned pertain. one that definitely does not the people aren't technically competent to deal. and i'm endlessly impressed with the -- you know, with the intelligence and, you know, accidentsy of -- decency of the people who work at the institutions. they want to do well by the countries. in some ways that's the most scary way about it. these things are so unpredictable and so -- you know, in some ways kind of mysterious that, you know, even very intelligent people can't anticipate and stop them once
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they start -- once bad things start to happen. that was definitely one of the main messages of my book, about the asian and the russian and the brazilian crises and the crises in the u.s. in 1998. i go into quite a bit of detail in the book about why people at the fund missed this problem that was building up. and i think ultimately what it boils down to is that they became so enraptured with this star pupil of theirs that they were convinced that high growth was going to continue for -- they extrapolated it out into the future. as they extrapolate high growth out into the future, you don't have to worry about a big bit of debt. anyone can borrow at a moderate level if their income is fast enough to pay it off and that's what they assumed was going to happen.
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having said that, they were smart enough to see, particular he in the spring of 1998 and i go into quite a bit of detail about the episode, they were smart enough to see that trouble was brewing and they issued -- they were quite -- i mean, they came as close as they'd ever come to sort of blowing the whistle publicly and saying there's -- houston, we've got a problem. and the markets blew them off and said, oh, come on, there's not a problem, this is a great country and another part of the explanation was that right around the time in the summer of 1998, the i.m.f. do they were really getting worried. they said this is not our star pupil, i mean, that's putting it strongly.
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i mean, they were going to come as close to what the i.m.f. to pub luck saying we're terribly concerned about the direction this country is taking. they were going to not complete a review of the program. the people who followed this, they know what it means. i mean, it means that they really see a problem. the timing for this was terrible because right -- in the summer of 1998, russia was defaulting on its debt and the world was coming to an end in the financial terms. there was a terrible meltdown all over the world and that's when the long term capital management hedge fund went bust and all hell was breaking loose. the i.m.f. and sort of the committee to save the world, you know, i mean, they were running around thinking my god, what do we do now? one of the things they did, they said we need to -- we need to run is one country that we're going to pick as our model for everyone to follow because evyo


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